Short-term policy gimmicks need to be set aside in favor of longer-term tax and regulatory reforms.

By Glenn Hubbard And Kevin Warsh

June 21, 2015 5:37 p.m. ET

Photo: Getty Images/Ikon Images

Economic growth in real terms is averaging a meager 2.2% annual rate in the 23 quarters since the recession’s trough in June 2009. The consensus forecast of about 1% growth for the first half of this year offers little solace.Americans need not be resigned to such a dim fate. A clarion call for faster economic growth—even 4%, as presidential candidate Jeb Bush recently said—is a worthy and viable aspiration. The economy has achieved it before: The average growth rate was 4% or higher 17 times in the rolling four-year periods since 1950. It can reach that goal again. But it won’t be easy, and it will require a fundamental change in the conduct of economic policy. History suggests a dramatic surge in economic growth is often preceded by a persistent shortfall in economic performance. After the severe recession of 1973-75, for example, the economy grew at a 3.6% annual real rate during the 23 quarters that followed. History also makes clear that better macroeconomic policies can drive growth. President Reagan’s agenda—tax cuts, regulatory reforms and support of sound monetary policy—are a prominent example. After the deep recession of 1981-82, real GDP growth averaged 4.8% in the next 23 quarters. President Kennedy’s personal income-tax rate cuts in the mid-1960s and President Clinton’s tax reductions on capital accompanied by budget restraint in the late 1990s offer other examples of pro-growth policy improvements.So why hasn’t the country rebounded sharply in the past six years? The recession was officially over in mid-2009, and toward the end of that year the economy showed signs of recovery. A massive fiscal spending stimulus had been signed into law. The Federal Reserve was embarking on an unprecedented monetary accommodation. Leading economists and forecasters predicted the economy would respond to this policy elixir with a great surge in performance.

On Dec. 9, 2009, for example, the Federal Reserve staff presented its “Long-Term Outlook” for economic growth to the Federal Open Market Committee. In the so-called Greenbook forecasts, Fed staff projected that real GDP would grow by 3.6% at an annual rate in 2010, increase to 4.5% in 2011, peak at 4.7% in 2012 and 2013, and then grow 3.2% in 2014. These kinds of growth rates were not without precedent, and the Fed’s forecasting record compares favorably with the Blue Chip forecasts of private forecasters.

But growth has been about one-half of the Fed’s projections. The country has experienced the weakest expansion since World War II. Participation in the labor force is near its lowest level since 1978. The country is in the midst of the worst five-year run for productivity ever measured outside of a recession. All the while, households and businesses with big balance sheets have been enriched by the superior performance of the stock market.

Many leading economic thinkers judge the economy’s underperformance as unrelated to the policies adopted in the last several years. Instead, their thinking goes, the economy is no longer capable of performing as in previous recoveries. So Americans should resign themselves to a low-growth trajectory. Some call this the “new normal,” others “secular stagnation.” And some forecasters seem convinced that these pessimistic projections are as reliable as optimistic projections of several years ago.

We strongly disagree. A more vigorous recovery from the financial crisis was an opportunity squandered. Even today, the economy can grow at significantly higher rates than the prevailing pessimism.

The next president can and should raise the country’s hopes and aspirations. But words alone won’t suffice. Instead, what’s needed for more rapid growth is a long-term commitment to policies that significantly increase U.S. economic potential. Short-term policies such as temporary tax and spending changes that have characterized the recent years should be set aside in favor of longer-term tax reform and removal of other barriers to economic growth.This means policies that bring more people into the workforce. It means encouraging real capital investment to drive higher levels of productivity growth. It means resetting long-run expectations of potential for every individual, household and business. It means making the United States the best place in the world in which to invest and work. Examples? Fundamental tax reform that is directed at increasing the incentives for work and driving investment in productive assets. Real regulatory reform that firmly and consistently recognizes, measures and balances economic benefits and costs—and no longer protects incumbent firms from disruptive new competitors. Tax and regulatory reform can make the United States the preferred destination for work and investment.Trade policies must continue to break down non-tariff barriers to open global markets. Education policy must be geared toward empowering schools to put students and the skills they need above entrenched interests. And support for training can foster investment in skills over time.When the right policy choices are made, monetary policy could get out of the business of trying to bail out the economy from the failings of other macroeconomic policies. Long-term economic forecasting is difficult, and economic models are not crystal balls. But directional policy changes are essential. The underperformance of the economy in recent years should cause policy makers to revisit their failed prescriptions for higher economic growth. A fundamentally new set of economic policies should be enacted to give growth a chance. And setting a goal of 4% growth invites meaningful policy contributions from those who would be our leaders. Mr. Hubbard, dean of Columbia Business School, was chairman of the Council of Economic Advisers under President George W. Bush. Mr. Warsh, a former Federal Reserve governor, is a distinguished visiting fellow at Stanford University’s Hoover Institution and a lecturer at the Stanford Graduate School of Business.

The fed-funds rate—the overnight lending rate banks charge one another for funds maintained at the Fed—is currently 0% to 0.25%.

By Vito J. Racanelli

Updated June 22, 2015 5:30 p.m. ET

The Federal Reserve’s interest-rate view finally caught up with the market last week. We’re being facetious, but only a little.

In November 2014, this column noted that prices in the Treasury futures market were suggesting a federal-funds rate of 0.70% at the end of 2015. Back then, the central bank’s policy-setting Federal Open Market Committee projected that the rate would be as high as 1.4% by year end. The fed-funds rate—the overnight lending rate banks charge one another for funds maintained at the Fed—is currently 0% to 0.25%.

Cut to last Wednesday, following the FOMC’s latest meeting, when the Fed signaled there would probably be only one hike this year, instead of the two that officials previously expected. The FOMC’s median fed-funds-rate expectation for the year end is now 0.63%, and the average is 0.57%. Both are closer to what the futures market, not policy makers, predicted, so chalk one up to the market’s foresight.

Now what? Many economists and investors think the first hike will come in September, but the Treasury futures market continues to see a less aggressive rate environment than the Fed has forecast, both in the short and long term (see nearby chart). The futures indicate there’s a 52% chance the Fed will first lift rates in December. The probability of a September hike is just 17%.

The futures say a hike is “just a coin toss,” even as late as December, says Nicolas Colas, chief market strategist at Convergex. Some think it will come in September because the FOMC meeting that month will be followed by a regularly scheduled press conference with Chair Janet Yellen. But the Fed follows the data, not the press schedule, Colas notes.

The Fed’s expectations have come down dramatically, he adds. The Fed is now looking for 1.8% to 2% growth this year in U.S. gross domestic product, down from a projection in March of 2.3% to 2.7%. For year-end 2016, the median FOMC fed-funds projection is 1.63%, but the futures market puts the rate at 1.1%.

There is a potential political component to rate hikes that the Fed doesn’t acknowledge but most Fed watchers assume. Next year is an election year, and the central bank doesn’t want its interest-rate hikes to be politicized. It probably will want to be well into a tightening program before the election campaign begins in earnest.

When the Fed starts to tighten, why would bond investors wait for a “gradual” rise in rates, asks Bob Eisenbeis, chief monetary economist at Cumberland Advisors. If Treasury bonds are going to be marked down steadily, many holders could “run for the exits” in advance, he says. While some money could move into stocks from fixed-income assets, he says, a disorderly rout in the bond market is likely to rattle equity markets, too, particularly in the short term.

If the global economy continues to expand, even slowly, and the road to higher interest rates is long and gradual, history suggests stocks will weather the rate hikes after some initial selling. The smart money is betting that U.S. Treasury yields will stay lower for longer, still a broadly supportive backdrop for equities.

Washington is once again talking about stationing nuclear warheads in Europe. Russia, too, is turning up the rhetoric. Europeans are concerned about becoming caught in the middle of a new Cold War. By SPIEGEL Staff

It's been more than three decades since the vast peace protests took over Bonn's Hofgarten meadow in the early 1980s. Back then, about half a million protesters pushed their way into the city center, a kilometer-long mass of people moving through the streets. It was the biggest rally in the history of the German Federal Republic.Today, the situation isn't quite that fraught, but it seems feasible that a similar scene may soon play out in front of the Chancellery in Berlin. For some time now, the Americans have once again been thinking about upgrading Europe's nuclear arsenal, and in the past week, a rhetorical arms race has begun that is reminiscent of the coldest periods of the Cold War. Foreign Minister Frank-Walter Steinmeier warned of an "accelerating spiral of escalating words and then of actions." He described them as "the old reflexes of the Cold War." Berlin is concerned that Europe could once again become the setting of a new East-West confrontation -- and that Germany might once again become a deployment zone. A source in the Defense Ministry suggested that "more (military) equipment may once again be stockpiled in Germany." Washington plans to station tanks, weapons and heavy equipment for 5,000 soldiers in Germany and the eastern NATO countries. US President Barack Obama hopes that doing so will soothe the fears of the Baltic States and countries in Eastern Europe, which, since the Ukraine crisis, are once again fearful of Russian aggression. He also hopes to quiet his critics in US Congress.For German Chancellor Angela Merkel, this prospect is not a pleasant one. She shies away from publicly criticizing her American allies, but Merkel is loathe to do anything that might heat up the conflict with Moscow. Furthermore, a new debate on rearmament would hardly be winnable on a domestic front. The chancellor would potentially look like a puppet of the United States, one who not only allows herself to be spied on, but who also stands by as her carefully established link to Putin is damaged.

Avoiding Open Disagreement

Moscow sees the American plans as a further proof that Washington intends to expand its military sphere of influence in Europe. Foreign Minister Sergei Lavrov's spokesman has said that "Washington and its partners are clearly aiming for the final break-up of the NATO-Russia Founding Act."Berlin, however, does not want to abandon the treaty. Consistent with the treaty, the German government has fundamentally ruled out the "substantial" or "permanent" stationing of NATO troops in the former Eastern Bloc. That wording was chosen to assuage Russian concerns about NATO's eastward expansion.The US plans appear designed with an eye toward avoiding an open disagreement. That is why Washington only intends to send a few companies to the border nations, say sources at NATO headquarters in Brussels. The larger part of the brigade will be initially stationed in Grafenwöhr, in the German region of Upper Palatinate. The same is apparently true of the heavy weaponry. The Bundeswehr, Germany's armed forces, estimates that it will include approximately 100 battle tanks. The German Defense Ministry believes that US Defense Minister Ashton Carter will be discussing the details with German Defense Minister Ursula von der Leyen during his visit on Monday. Still, many NATO member states are critical of the plans, particularly in Western Europe. Internally, some are warning against escalating the conflict with Russia. Stationing weapons in Europe is not characteristic of "an exit strategy," said Luxembourg Prime Minister Xavier Bettel on Tuesday during a visit to Berlin. The new US plans are only the latest step in an overall period of rearmament, a dangerous development that had already started before the outbreak of the Ukraine crisis. Washington and Moscow have cancelled or undermined one disarmament treaty after another. The end of the Cold War saw the signing of a number of far-reaching agreements pertaining to conventional and nuclear disarmament, from the Treaty on Conventional Armed Forces in Europe to the Strategic Arms Reduction Treaty. But now, the agreements, some of which took decades to hammer out, are losing their value. "Moscow no longer believes the West and the West doesn't believe Moscow. That's terrible," declared Mikhail Gorbachev told SPIEGEL in January. "If one side loses its nerves in this inflamed atmosphere, then we won't survive the coming years," he said.

Wild Threats

At issue are longer just conventional weapons, but also nuclear arms as well. Moscow is working on modernizing its nuclear arsenal, and has issued some wild threats. A high-ranking official in the Russian Foreign Ministry spoke in March about possibly stationing nuclear weapons in Crimea. And the Americans, too, are considering expanding their nuclear arsenal in Europe. For some time now, Washington has been thinking about positioning nuclear-equipped cruise missiles in Europe, as it did in 1979 during the NATO Double-Track decision that led the trans-Atlantic alliance into the worst crisis in its history.The American logic is as follows: For some time now, Washington has been accusing Russia of violating the Intermediate-Range Nuclear Forces Treaty (INF). The legendary agreement, which was signed by US President Ronald Reagan and Mikhail Gorbachev in 1987, signaled the end of the Cold War. In the agreement, both superpowers agreed to scrap all land-based intermediate-range atomic weapons and to renounce them in the future. Now Washington believes this treaty has been violated, and is threatening to react. NATO Supreme Allied Commander Europe Philip Breedlove has already announced that the introduction of a weapon that violates the INF Treaty "can't go unanswered.""We would like Russia, and our Allies, to know that our patience is not unlimited," said Frank Rose, who is in charge of arms control at the State Department, a few weeks ago. And Principal Deputy Under Secretary of Defense at the Pentagon Brian Mckeon announced that Washington woulddevelop a response to safeguard the security interests of the United States and its allies and that such a response would involve the stationing of land-based cruise missiles in Europe.In Europe, these considerations are being viewed critically. When the Americans placed the subject on the agenda of the NATO defense ministers meeting in February, the Germans and the French spoke out against NATO retaliatory measures, not least because there was only shaky proof of what weapons the Russians had actually tested. The allies are having trouble evaluating whether Moscow actually has violated the INF Treaty, which the Russians vehemently deny. Although none of the European intelligence services have better surveillance capabilities than the Americans, nobody wants to rely purely on US findings. It has become known that Washington is particularly concerned about the R-500 cruise missile, with an estimated range of 500 kilometers, and the RS-26 ballistic missile, which could threaten the entire NATO territory. The US believes that both have been tested in a manner that violates the INF Treaty.

Casting Doubt

The Europeans don't think that's necessarily the case. Members of NATO's Nuclear Planning Group concluded during the last ministers meeting that the refurbishment planned by Moscow does not violate any treaty. Weapons expert Oliver Meier, from the German Institute for International and Security Affairs (SWP) in Berlin, also doubts the US claims: "The RS-26 definitely does not violate the INF Treaty," he says. But President Obama is under enormous pressure from Congress, wiht lawmakers accusing Obama of being far too willing to give in to Putin. During a hearing several months ago, a number of representatives repeatedly interrupted Under Secretary of State for Arms Control and International Security Rose Gottemoeller. But Moscow too is increasly casting doubt on the INF Treaty. "It is only a scrap of paper," says military expert Victor Murachovski. "If NATO planes can now already reach Saint Petersburg in five minutes from Estonia, and NATO warships are cruising around the Baltic Sea and Black Sea, then this agreement is worthless for Russia."In German military circles, though, people are interpreting the Russian saber-rattling as a sign of weakness. Unlike during the Cold War, the Russians do not have as many conventional weapons as NATO. In response, Moscow -- like the West during the Cold War -- intends to rely on nuclear deterrence. The Bundesnachrichtendienst (BND), Germany's foreign intelligence agency, currently does "not see any substantial change to the danger" posed by Russia. The nuclear threats by Moscow -- Putin announced his intention to acquire 40 intercontinental missiles -- were described by BND Vice-President Guido Müller, in a secret meeting in front of select lawmakers, as little more than a "propaganda show."

According to Müller, the refurbishment plans are well known. Since a speech by Putin at the end of 2014, the upgrade has been seen as a fait accompli by the German intelligence agency. But analysts at the BND believe the chances of success are not high: Purely from a technical standpoint, the modernization of the 40 nuclear warheads in such a short period of time is hardly possible, the BND vice-president said. Russia experts at the BND describe it as "passive aggressive behavior." What's important to Putin is its effect on his opponent, not the degree to which his statements are true.

'A Great Deal of Concern'

For the German government, the prospect of nuclear rearmament would be a nightmare. In the early 1980s, millions of people in Germany, as well as in Italy and the Netherlands, took to the streets because they feared a nuclear war in Europe. As an answer to the Soviet SS-20 nuclear missiles, the Western allies had provided Moscow with a proposal: They were prepared to negotiate about the disarmament of these types of systems, but if the Soviet side wasn't prepared to compromise, the West would station about 600 nuclear missiles on its side. And that's exactly what happened.For the German government, even the discussion about intermediate-range missiles is touchy. A huge majority of Germans don't want new American nuclear weapons in Europe. On the contrary, they would prefer to see the last American B-61 atomic bombs stored near Büchel, in western Germany, removed.The Social Democrats in particular remember the Nato Double-Track Decision with horror. It indirectly cost Chancellor Helmut Schmidt his office in 1982, and led the SPD to the precipice of division. It also contributed significantly to the rise of the Green Party. A new rearmament would test the party's ability to stay together, and also erase all chance of a new coalition with the Green Party for the foreseeable future. Rolf Mützenich, deputy floor leader of the SPD in German parliament, is watching developments with "a great deal of concern."At the end of the 1970s, NATO's armament plans were tied to an offer of dialogue. Today too, the West is emphasizing the need to remain in talks with Putin, but the venues that existed for such dialogue before Ukraine crisis, like the G-8 and the Nato-Russia Council, have all been put on ice. For this reason, Green politician Jürgen Trittin is pushing the German government to immediately begin an initiative to revive the Nato-Russia Council. "We are experiencing a dynamic that can quickly lead to a real arms race," the senior Green Party member warns. Measures need to be put into place, he believes, to interrupt the "tit-for-tat" spiral. For this, the Nato-Russia Council would once again need to become a "site of dialogue." What's needed at the moment, he argues, is "talking instead of arming."

Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular prosperity, all in the midst of temporary stable prices. Everyone benefits, and no one pays. That is the early part of the cycle.-- From the book Dying of Money by Jens O. Parsson

On the first day of school in the year 2020, excited students file in, sit down, pull out tablets, paper and pen. Most are stylishly dressed, from well-to-do families. The chatter at a high pitch, the room carries an obvious sense of excitement.For the first time, the university is offering Economics 403, The Great Inflation. The instructor, who had not yet entered the room, was quite notable, world famous in fact. A few years back he had been convicted of orchestrating what had become known as The Great Inflation. As a part of his sentencing agreement, he was to teach classes on the effects of inflation.Suddenly, as though on cue, the chatter stops and an aged rather tired looking man enters. He's a bit disheveled, overweight, shoulders rolled forward. The top button of his shirt undone, his tie looks like an afterthought. Attempting a smile he says quietly, "Good morning. As many of you know, this is my first day; a court mandate. Bear with me." Some students respond with a Good morning, others stare. "So this is the Fed guy my parents talk about,"a student whispers.After coughing, clearing his throat, the instructor murmurs, "This is Economics 403. We'll be studying what led up to the Great Inflation; what mistakes were made during this period.Everything," emphasizing the word 'everything,' "needs to be examined in this class; my conviction, the 18% unemployment rate, the riots, and why a new currency was issued. We're going to talk. My mandate from the court is to pass on to you the lessons learned from one of the more difficult periods in American history." He looks out into the classroom, carefully studying each face. So young, he thinks to himself, so young..."Questions?"All heads went down, as though they were taking their final exams. Finally one brave soul raises her hand. "Ah... like... like, did you really cause The Great Inflation?" She pauses. Her voice rises in pitch to compensate for her nervousness. "My parents said it was a mess, and it's your fault!" she blurts out. Silence floats through the room like the sound of a feather drifting towards the earth. The students nervously adjust themselves in their seats. As accusatory as the question was, the ice had been broken. The students now felt a certain freedom to ask away.In an instant the instructor's speech and mannerisms change; his shoulders straighten. "Look," he says forcefully, with a twinge of anger in his voice. He had defended his actions during his court trials, and he would be defending himself now in the classroom. "You're gonna know the truth. But for now, before you start pointing fingers, let's review a few things." Tablets turned on, pens at the ready. He begins his talk.He looks away, as though trying to choose his words in a way which would be understood. "In 1971, Richard Nixon took us off the gold standard. Up until that point in American history, the dollar was essentially backed by gold." "Why gold?" a student queries. "Well, gold has been considered money for 5000 years. Gold is hard to find and in short supply. But more importantly, gold was, and is, a restrainton the creation of money." He paused for a moment, and repeats the word very slowly . . . 'restraint.' He looks around the room. Did they get it?Continuing, "Gold was a discipline; the government could only print so much money, based on the amount of gold it possessed. Printing money not backed by gold had been tried before in history, but always failed. Always. The Continental, the Confederate dollar, the Mark in Weimar Germany are a few examples.""Well, what went wrong after Nixon took us off the gold standard?" a student quips."Nothing went wrong immediately, but rather, it was the beginning of a slow creeping inflation. A car costing $3000 in 1971, cost $7000 in 1980, $14,000 in 1990, $18,000 in the year 2000, and $25,000 by 2015. Everything kept going up in price, medicine, housing, food, gas, you name it. As a result of this new freedom the government had to live beyond its means, the national debt grew dramatically, from a manageable figure in 1970, to a trillion dollars in 1980, three trillion in 1990, six trillion in 2000, to a staggering eighteen trillion by 2015.""Why was the government spending so much money?" another student asks. "Without any restraints, it was easy. They took on new responsibilities and created new dependencies. Entitlements grew like," he paused looking for the right words, "grew like weeds in an open field. And the military, without budget constraints, found itself fighting in conflicts worldwide. Tax payers never felt the cost; war was simply added on to the national debt. Baby boomers were retiring in droves, putting enormous strains on Medicare. There's only one way to deal with this. Only one way," he repeated. "Go into debt, greater and greater debt.""At what point did things spin out of control?" asks a student. "Oh," scratching his head, "let's start" pausing for a moment, "let's start with hurricane Katrina. In a way, Katrina set the stage for the run-away inflation. After the storm, it was assumed the Federal Government would pay for everything associated with a disaster, man-made, or nature-made." It was no longer an individual, local community or state issue. All eyes looked to Washington. They paid for everything; paid by increasing the national debt, of course.The instructor takes a slow deep breath. "O.K., now for a bit of history; in 1811 we had the New Madrid earthquakes affecting the states of Missouri, Tennessee and Arkansas; the largest quakes in America, vast in area and enormous in their devastating effects. Thousands of aftershocks continued for months, opening up crevices in the land. Those in the area reported sounds of loud thunder in the distance accompanying the quakes." The professor paused, looked at each face. Mesmerized, he had their attention. Continuing, "They were so powerful; boatmen on the Mississippi claimed for many hours the river ran backwards. Terrifying, these quakes were nothing short of terrifying.""So, when the New Madrid fault slipped again in 2016, creating an 8.9 earthquake, it was no surprise. Scientist warned this was still an active zone. The surprise was, nobody was prepared, no emergency funds set aside, no plans for temporary housing for millions who would need shelter. After Katrina, the thinking was, the Feds would handle it. But this was different, much larger in scope. Insurance companies couldn't manage and went belly-up. Manufacturing plants in the area were leveled." Small businesses shut down. He looked around the room, studied the faces "Everyone in this room probably remembers the images on T.V., and the calls for the government to do something.""We were paying for multiple wars in the Middle East and sky-rocketing Medicare costs back home. And, we were paying interest on the twenty-two trillion dollar national debt. The earthquake, this was the straw. He paused for what seemed like a minute, "The straw.""All eyes on Washington, the government borrowed and borrowed. Money flowed like water gushing out of a fire hydrant. We couldn't print money fast enough." Pausing, he puts his hand to his forehead, rubbing his temples and looks down, as though speaking to the floor. "In Weimar Germany, during the last days of their hyperinflation, the need for notes, for currency, was so urgent; they didn't have time to print the currency on both sides, so they printed only on one side." A student in the back of the room whispers "Man, I think he's getting choked-up."The professor looks up, "I told the Congress to stop it! I told them over and over, this debt will destroy us. But politicians, from all over the country, made sure the money kept flowing, and they'd get a piece of the action. It was a money party with no adult supervision.""The value of the dollar plummeted; prices skyrocketed, devastating the middle class. People spent their money as fast as they could; knowing prices would go up the following day. The public finally came to the awareness the dollar was paper, backed by nothing, simply paper. The dollar, at home and worldwide was no longer trusted. Hence, the eventual creation of the new currency, those bills crumpled up in your pockets.""This was the Great Inflation. It was inevitable; the earthquake helped things along, but, it was inevitable.""So, why are you blamed?" a student asks. The instructor pauses for a moment. "I'm a scapegoat" he says matter-of-factly. "Yes, I was in charge of the printing presses, but I was only responding to the call for greater and greater debt. Like I said, everyone looked to Washington to solve their problems.I was part of a well-oiled debt machine."The classroom fell silent. Finally, one student, out of discomfort with the quiet, asks "do you think you are... are responsible?" Shoulders back, crossing his arms against his chest, "Absolutely not! I gave the American people what they wanted, what they had grown to expect." "What was that?" the same student asks? "An economy created by Washington ... a false utopian economy" he fires back.A student in the back of the classroom stands up as if to signify an important question. "I don't get it" he says, "the dollar trashed; we issue a new currency, the New American Dollar." He hesitates, then almost shouts: "the N.A.D. isn't backed by anything either. This is stupid, really stupid. What will prevent this inflation thing from happening again?""Yes, yes," the instructor shouts. "You hit the nail!" He looks across the room slowly, studies the faces, calculates their ages and approximate life spans. "If you look at history, at human nature, at politicians, without a currency backed by something, something that restrains spending, this inflationary cycle will happen again, and again, and again." He pauses for a moment, and says slowly "it will happen again . . . in your lifetime."Looking at his watch, he flicks his wrist towards the door, signaling the students to leave. "Go. Tomorrow, bring your questions." They file out, many voicing a Thank you.After straightening his tie, he follows the last student out, thinking: They got it. That felt good, really good.

Blackstone celebrated its eighth anniversary as a public company over the weekend. That it has just raised yet another private equity fund, this one at $17bn in seven months, bringing its total funds under management to more than $300bn, is another indication of both its clout and how far ahead of its rivals it is.

Moreover, it has no succession issues in contrast to some of its peers, such as Apollo or Carlyle, and many banks including Goldman Sachs and JPMorgan. When Blackstone went public, it instituted a lock-up for eight years before the shares fully vested for some of its partners, but now that the shares have fully vested there have been few departures. There is little doubt that Blackstone’s founder Steve Schwarzman and its president Tony James have built a best-in-class firm.

Blackstone’s market cap is more than $50bn — more than all the key rivals combined (KKR at about $19bn, Carlyle at $9.2bn, Oaktree Capital Management at $8.2bn and Apollo Global Management at $3.7bn). The shares trade at about $42, comfortably beyond the $31 listing price and well above the financial crisis low of $3.55 plumbed in 2009. Blackstone is also generous to shareholders, paying big dividends, though admittedly the main beneficiaries are Blackstone executives with 51 per cent of the shares.

In other words, the past few years have been kind to Blackstone and every other private equity firm. The Federal Reserve’s quantitative easing and zero interest rate policies have been especially kind to users of other people’s money, such as the big alternative investment firms.

And yet the outlook for Blackstone and its competitors may not be as terrific — especially for their core private equity business.The fortunes of these firms have also been buoyed by record distributions as Blackstone and everyone else sold companies to take advantage of the rally in the stock market. Blackstone alone returned $50bn to investors in its funds in the past 12 months. But it is not apparent that their stock of portfolio companies can be replenished as attractively as they once could or as attractively as their corporate rivals.That is because companies are under pressure to spend their idle cash whether through share buybacks (and never mind the record level of their stock price) or through mergers and acquisitions, at a time when their revenues are not growing and any cash they have is earning next to nothing thanks to zero rates. Many executives feel the pressure, or potential pressure, of activist hedge funds that dislike seeing masses of cash sitting idle, as a recent report from Citigroup notes.

Meanwhile, purchase price multiples (enterprise value over ebitda) are at an all-time high of about 10 times, Citi says, deriving the figure by combining price earnings multiples and the public-to-private premium. While both financial and non-financial firms have to pay about the same price for debt, the equity of private equity firms is more expensive, which makes it difficult for them to outbid non-financial companies, even before considering the synergies that the latter can price in to their deals.Moreover, most of Blackstone’s competitors do not have anything like its diversified businesses.

In addition, in a speech in mid-May, Marc Wyatt, a Securities and Exchange Commission official, said the regulator might bring additional enforcement actions against these firms involving undisclosed and misallocated fees and expenses and conflicts of interest. The SEC has also widened its focus beyond private equity to look at real estate, credit and infrastructure funds. Investors are scrutinising their investment terms more closely than ever before.

What then is the ultimate fate of these curious creatures? There has been speculation that traditional asset management firms could buy them. BlackRock, which has a market cap of almost $60bn, for example, has been trying to build up its alternative business for a while without notable success. One former Carlyle executive, for example, speculated that the firm could easily be sold to the likes of BlackRock, given where the market values stand today. But investors who would consider these firms as candidates for takeovers should be cautious. Senior Carlyle executives say the structure of the agreements with the limited partners in their funds makes such takeovers virtually impossible.

Blackstone will probably do far better than its rivals, especially given its diversification. This is not a case of the higher they rise, the further they fall. But it does suggest even the best are not immune.

My Mac is on a moving truck somewhere between Pittsburgh and Eugene. Moving cross-country entails some work. But it’s exciting to be returning home after almost 30 years. I was a young CPA slaving away at Price Waterhouse in Portland back in 1986. I left for the better professional opportunities available at the time in Southern California. It's been a heck of a journey.

A lot has changed since 1986. I grew up in Oregon, the land of Steve Prefontaine, Tom McCall and “rugged individualism.” By the age of 11, I was making money delivering the Eugene Register-Guard, mowing lawns and working the strawberry and bean fields during the summers. My main source of reading was every word written about my beloved University of Oregon Ducks in the sports section. It was the age of Dick Harter, my childhood idol Ronnie Lee and the “Kamikaze Kids.” I didn’t realize it at the time, of course, but it was a special time to be a kid in Oregon. My upbringing prepared me well.

I had the great fortune of playing two years of high school basketball for Coach Paul (“Hoops”) Halupa (with assistant coaches Rick Havercroft and Mike Parker), who played for Harter at Oregon. To this day, I’m still fond of using one of Coach’s favorite lines: “It will quit hurting when the pain goes away.”

After two memorable seasons at Cottage Grove, we up and moved to Newport. In this neat little town on the beautiful Central Oregon Coast, I had the good fortune of building a relationship with another one of the toughest men I’ve ever met, basketball coach Tom Luther. Mr. Luther was the foreman on a salmon processing ship in Alaska, where I spent four summers working my way through university.

When times get tough, I think back to my most challenging experience in Alaska. Hit by an early run of salmon, we once worked 165 hours in a period of just over eight days. I can assure you that it is possible. I still have numbness in one of my big toes, a reminder of how my legs went completely numb from the knees down. Everyone worked hard – really hard. And no one ever complained. That would have been a sign of weakness.

So it feels right to come home. It’s the right time. We dropped off our oldest son at Ann Arbor for student orientation. He will be a freshman this fall at the University of Michigan. While our older son is part of the “entitlement generation,” I hope to make some changes in parenting for the benefit of our seven year-old. The world is changing, and surely not for the better. I want him fully immersed in hard work and nature. Riding bikes, fishing and simple things. We’re going to plant lots of things and we’re pondering even raising a few chickens. It’s going to be fun.

Over the years, I’ve given significant thought to where I wanted to move my family to ride out the global storm. I love Australia and seriously considered taking the family to the land down under. For a while, I thought about New Zealand. In the end, however, we’ve decided to stay in the U.S. I expect serious issues – but I plan on being prepared. As an optimist and analyst, I have do doubt whatsoever that it will be a fascinating time.

It’s a nice spot. We can be to the University of Oregon campus, Matthew Knight Arena and Hayward Field in 10 minutes - and Autzen Stadium in 15. Yet it also feels remote – the type of place one would choose for hunkering down when things turn sour.

The past few weeks I haven’t had much time to write. But packing boxes and such has afforded the opportunity to reminisce and think. In a way, my life has come full circle. The global Bubble has come full circle. Much of my professional career has been immersed in analyzing a historic financial Bubble that at this point has gone beyond what I imagined even possible.

Thinking back, 1986 was a critical year. The U.S. “twin deficits” (fiscal and trade) were spiraling out of control. Loose financial conditions were also stoking a dangerous stock market Bubble. Bubble Dynamics were as well attaining powerful momentum in Japan. At the time, the common perception was that Japan – or at least their powerful banks and manufacturers – were going to take over the world.

It was a fateful period. Our policymakers should have more forcefully acted to rein in fiscal and Current Account deficits. Instead, financial conditions were aggressively loosened. Worse yet, the U.S. put intense pressure on the Japanese to loosen their policies to help rectify our trade deficits. The upshots were parallel U.S. and Japanese Bubbles. The U.S. stock market Bubble burst in late 1987 – with post-crash reflationary policies setting in motion Serial Boom and Bust Dynamics that have persisted/escalated now for almost 30 years. The damage wreaked from a prolonged “Terminal Phase” of Bubble excess in Japan is a quarter century later integral to the current “global government finance Bubble” – the Granddaddy of all Bubbles.

In hindsight, one could point to 1986 as the beginning of the end of the U.S. dollar as the world’s monetary anchor. Japan was the first major developed country to fall into the trap of unfettered “money” and Credit. They were the forerunner of the agony wrought from dysfunctional global financial policymaking and infrastructure.

By now, one would think that loose “money” would be recognized as the chief culprit for much of the world’s ills. The Greeks cannot be absolved from responsibility. But lost in the discussion is that the Greeks – like Japan, like Argentina, like Iceland, like millions of U.S. subprime borrowers and so on – were buried by dysfunctional global finance. Of course, if not for the euro Greece would never had been able to borrow hundreds of billions on the cheap. If not for a fundamentally impaired U.S. dollar, the euro and its cadre of “subprime” sovereigns would not have luxuriated in such easy Credit Availability. Ditto China and EM.

And this is where it gets scary. We now have a few decades of experience of The Perils of Loose Money. Yet, today it’s literally everywhere. It permeates. Somehow the loosest monetary policy imaginable – in the U.S., Europe, Japan, China and Asia is supposed to be part of the solution. Clearly it’s the problem – a very, very serious problem. The Chinese Bubble has inflated completely out of control. The U.S., Europe and Japan are not that far behind. It’s an unmitigated disaster in the making.

So I’m happy and relieved to have the family in Oregon. I’m excited to begin pursuing the next chapter of my career. Through the good and challenging years alike, I’ve always considered myself “a small town working class kid from Oregon” – nothing more, nothing less. The moving truck arrives next week. I’ll need some time to unpack the boxes – including my Mac.

And then I’ll be ready to get focused - to get my full attention back to the markets and to my analysis. I'm thinking the timing could be just about perfect. Thanks for reading.

The rich array of microbiota in our intestines can tell us more than you might think.

By PETER ANDREY SMITH

JUNE 23, 2015

Eighteen vials were rocking back and forth on a squeaky mechanical device the shape of a butcher scale, and Mark Lyte was beside himself with excitement. ‘‘We actually got some fresh yesterday — freshly frozen,’’ Lyte said to a lab technician. Each vial contained a tiny nugget of monkey feces that were collected at the Harlow primate lab near Madison, Wis., the day before and shipped to Lyte’s lab on the Texas Tech University Health Sciences Center campus in Abilene, Tex.Lyte’s interest was not in the feces per se but in the hidden form of life they harbor. The digestive tube of a monkey, like that of all vertebrates, contains vast quantities of what biologists call gut microbiota. The genetic material of these trillions of microbes, as well as others living elsewhere in and on the body, is collectively known as the microbiome. Taken together, these bacteria can weigh as much as six pounds, and they make up a sort of organ whose functions have only begun to reveal themselves to science. Lyte has spent his career trying to prove that gut microbes communicate with the nervous system using some of the same neurochemicals that relay messages in the brain.Inside a closet-size room at his lab that afternoon, Lyte hunched over to inspect the vials, whose samples had been spun down in a centrifuge to a radiant, golden broth. Lyte, 60, spoke fast and emphatically. ‘‘You wouldn’t believe what we’re extracting out of poop,’’ he told me. ‘‘We found that the guys here in the gut make neurochemicals. We didn’t know that. Now, if they make this stuff here, does it have an influence there? Guess what? We make the same stuff. Maybe all this communication has an influence on our behavior.’’

Since 2007, when scientists announced plans for a Human Microbiome Project to catalog the micro-organisms living in our body, the profound appreciation for the influence of such organisms has grown rapidly with each passing year. Bacteria in the gut produce vitamins and break down our food; their presence or absence has been linked to obesity, inflammatory bowel disease and the toxic side effects of prescription drugs. Biologists now believe that much of what makes us human depends on microbial activity. The two million unique bacterial genes found in each human microbiome can make the 23,000 genes in our cells seem paltry, almost negligible, by comparison. ‘‘It has enormous implications for the sense of self,’’ Tom Insel, the director of the National Institute of Mental Health, told me. ‘‘We are, at least from the standpoint of DNA, more microbial than human. That’s a phenomenal insight and one that we have to take seriously when we think about human development.’’

Given the extent to which bacteria are now understood to influence human physiology, it is hardly surprising that scientists have turned their attention to how bacteria might affect the brain. Micro-organisms in our gut secrete a profound number of chemicals, and researchers like Lyte have found that among those chemicals are the same substances used by our neurons to communicate and regulate mood, like dopamine, serotonin and gamma-aminobutyric acid (GABA). These, in turn, appear to play a function in intestinal disorders, which coincide with high levels of major depression and anxiety. Last year, for example, a group in Norway examined feces from 55 people and found certain bacteria were more likely to be associated with depressive patients.

At the time of my visit to Lyte’s lab, he was nearly six months into an experiment that he hoped would better establish how certain gut microbes influenced the brain, functioning, in effect, as psychiatric drugs. He was currently compiling a list of the psychoactive compounds found in the feces of infant monkeys. Once that was established, he planned to transfer the microbes found in one newborn monkey’s feces into another’s intestine, so that the recipient would end up with a completely new set of microbes — and, if all went as predicted, change their neurodevelopment. The experiment reflected an intriguing hypothesis. Anxiety, depression and several pediatric disorders, including autism and hyperactivity, have been linked with gastrointestinal abnormalities. Microbial transplants were not invasive brain surgery, and that was the point: Changing a patient’s bacteria might be difficult but it still seemed more straightforward than altering his genes.

When Lyte began his work on the link between microbes and the brain three decades ago, it was dismissed as a curiosity. By contrast, last September, the National Institute of Mental Health awarded four grants worth up to $1 million each to spur new research on the gut microbiome’s role in mental disorders, affirming the legitimacy of a field that had long struggled to attract serious scientific credibility. Lyte and one of his longtime colleagues, Christopher Coe, at the Harlow primate lab, received one of the four. ‘‘What Mark proposed going back almost 25 years now has come to fruition,’’ Coe told me. ‘‘Now what we’re struggling to do is to figure out the logic of it.’’ It seems plausible, if not yet proved, that we might one day use microbes to diagnose neurodevelopmental disorders, treat mental illnesses and perhaps even fix them in the brain.

In 2011, a team of researchers at University College Cork, in Ireland, and McMaster University, in Ontario, published a study in Proceedings of the National Academy of Science that has become one of the best-known experiments linking bacteria in the gut to the brain. Laboratory mice were dropped into tall, cylindrical columns of water in what is known as a forced-swim test, which measures over six minutes how long the mice swim before they realize that they can neither touch the bottom nor climb out, and instead collapse into a forlorn float. Researchers use the amount of time a mouse floats as a way to measure what they call ‘‘behavioral despair.’’ (Antidepressant drugs, like Zoloft and Prozac, were initially tested using this forced-swim test.)

For several weeks, the team, led by John Cryan, the neuroscientist who designed the study, fed a small group of healthy rodents a broth infused with Lactobacillus rhamnosus, a common bacterium that is found in humans and also used to ferment milk into probiotic yogurt. Lactobacilli are one of the dominant organisms babies ingest as they pass through the birth canal. Recent studies have shown that mice stressed during pregnancy pass on lowered levels of the bacterium to their pups. This type of bacteria is known to release immense quantities of GABA; as an inhibitory neurotransmitter, GABA calms nervous activity, which explains why the most common anti-anxiety drugs, like Valium and Xanax, work by targeting GABA receptors.

Cryan found that the mice that had been fed the bacteria-laden broth kept swimming longer and spent less time in a state of immobilized woe. ‘‘They behaved as if they were on Prozac,’’ he said. ‘‘They were more chilled out and more relaxed.’’ The results suggested that the bacteria were somehow altering the neural chemistry of mice.

Until he joined his colleagues at Cork 10 years ago, Cryan thought about microbiology in terms of pathology: the neurological damage created by diseases like syphilis or H.I.V. ‘‘There are certain fields that just don’t seem to interact well,’’ he said. ‘‘Microbiology and neuroscience, as whole disciplines, don’t tend to have had much interaction, largely because the brain is somewhat protected.’’ He was referring to the fact that the brain is anatomically isolated, guarded by a blood-brain barrier that allows nutrients in but keeps out pathogens and inflammation, the immune system’s typical response to germs. Cryan’s study added to the growing evidence that signals from beneficial bacteria nonetheless find a way through the barrier. Somehow — though his 2011 paper could not pinpoint exactly how — micro-organisms in the gut tickle a sensory nerve ending in the fingerlike protrusion lining the intestine and carry that electrical impulse up the vagus nerve and into the deep-brain structures thought to be responsible for elemental emotions like anxiety. Soon after that, Cryan and a co-author, Ted Dinan, published a theory paper in Biological Psychiatry calling these potentially mind-altering microbes ‘‘psychobiotics.’’

It has long been known that much of our supply of neurochemicals — an estimated 50 percent of the dopamine, for example, and a vast majority of the serotonin — originate in the intestine, where these chemical signals regulate appetite, feelings of fullness and digestion. But only in recent years has mainstream psychiatric research given serious consideration to the role microbes might play in creating those chemicals. Lyte’s own interest in the question dates back to his time as a postdoctoral fellow at the University of Pittsburgh in 1985, when he found himself immersed in an emerging field with an unwieldy name: psychoneuroimmunology, or PNI, for short. The central theory, quite controversial at the time, suggested that stress worsened disease by suppressing our immune system.

By 1990, at a lab in Mankato, Minn., Lyte distilled the theory into three words, which he wrote on a chalkboard in his office: Stress->Immune->Disease. In the course of several experiments, he homed in on a paradox. When he dropped an intruder mouse in the cage of an animal that lived alone, the intruder ramped up its immune system — a boost, he suspected, intended to fight off germ-ridden bites or scratches. Surprisingly, though, this did not stop infections. It instead had the opposite effect: Stressed animals got sick. Lyte walked up to the board and scratched a line through the word ‘‘Immune.’’ Stress, he suspected, directly affected the bacterial bugs that caused infections.

To test how micro-organisms reacted to stress, he filled petri plates with a bovine-serum-based medium and laced the dishes with a strain of bacterium. In some, he dropped norepinephrine, a neurochemical that mammals produce when stressed. The next day, he snapped a Polaroid. The results were visible and obvious: The control plates were nearly barren, but those with the norepinephrine bloomed with bacteria that filigreed in frostlike patterns. Bacteria clearly responded to stress.

Then, to see if bacteria could induce stress, Lyte fed white mice a liquid solution of Campylobacter jejuni, a bacterium that can cause food poisoning in humans but generally doesn’t prompt an immune response in mice. To the trained eye, his treated mice were as healthy as the controls. But when he ran them through a plexiglass maze raised several feet above the lab floor, the bacteria-fed mice were less likely to venture out on the high, unprotected ledges of the maze. In human terms, they seemed anxious. Without the bacteria, they walked the narrow, elevated planks.

Each of these results was fascinating, but Lyte had a difficult time finding microbiology journals that would publish either. ‘‘It was so anathema to them,’’ he told me. When the mouse study finally appeared in the journal Physiology & Behavior in 1998, it garnered little attention. And yet as Stephen Collins, a gastroenterologist at McMaster University, told me, those first papers contained the seeds of an entire new field of research. ‘‘Mark showed, quite clearly, in elegant studies that are not often cited, that introducing a pathological bacterium into the gut will cause a change in behavior.’’

Lyte went on to show how stressful conditions for newborn cattle worsened deadly E. coli infections. In another experiment, he fed mice lean ground hamburger that appeared to improve memory and learning — a conceptual proof that by changing diet, he could change gut microbes and change behavior. After accumulating nearly a decade’s worth of evidence, in July 2008, he flew to Washington to present his research. He was a finalist for the National Institutes of Health’s Pioneer Award, a $2.5 million grant for so-called blue-sky biomedical research. Finally, it seemed, his time had come. When he got up to speak, Lyte described a dialogue between the bacterial organ and our central nervous system. At the two-minute mark, a prominent scientist in the audience did a spit take.

‘‘Dr. Lyte,’’ he later asked at a question-and-answer session, ‘‘if what you’re saying is right, then why is it when we give antibiotics to patients to kill bacteria, they are not running around crazy on the wards?’’

Lyte knew it was a dismissive question. And when he lost out on the grant, it confirmed to him that the scientific community was still unwilling to imagine that any part of our neural circuitry could be influenced by single-celled organisms. Lyte published his theory in Medical Hypotheses, a low-ranking journal that served as a forum for unconventional ideas. The response, predictably, was underwhelming. ‘‘I had people call me crazy,’’ he said.

But by 2011 — when he published a second theory paper in Bioessays, proposing that probiotic bacteria could be tailored to treat specific psychological diseases — the scientific community had become much more receptive to the idea. A Canadian team, led by Stephen Collins, had demonstrated that antibiotics could be linked to less cautious behavior in mice, and only a few months before Lyte, Sven Pettersson, a microbiologist at the Karolinska Institute in Stockholm, published a landmark paper in Proceedings of the National Academy of Science that showed that mice raised without microbes spent far more time running around outside than healthy mice in a control group; without the microbes, the mice showed less apparent anxiety and were more daring. In Ireland, Cryan published his forced-swim-test study on psychobiotics. There was now a groundswell of new research. In short order, an implausible idea had become a hypothesis in need of serious validation.

Late last year, Sarkis Mazmanian, a microbiologist at the California Institute of Technology, gave a presentation at the Society for Neuroscience, ‘‘Gut Microbes and the Brain: Paradigm Shift in Neuroscience.’’ Someone had inadvertently dropped a question mark from the end, so the speculation appeared to be a definitive statement of fact. But if anyone has a chance of delivering on that promise, it’s Mazmanian, whose research has moved beyond the basic neurochemicals to focus on a broader class of molecules called metabolites: small, equally druglike chemicals that are produced by micro-organisms. Using high-powered computational tools, he also hopes to move beyond the suggestive correlations that have typified psychobiotic research to date, and instead make decisive discoveries about the mechanisms by which microbes affect brain function.

Two years ago, Mazmanian published a study in the journal Cell with Elaine Hsiao, then a graduate student at his lab and now a neuroscientist at Caltech, that made a provocative link between a single molecule and behavior. Their research found that mice exhibiting abnormal communication and repetitive behaviors, like obsessively burying marbles, were mollified when they were given one of two strains of the bacterium Bacteroides fragilis.

The study added to a working hypothesis in the field that microbes don’t just affect the permeability of the barrier around the brain but also influence the intestinal lining, which normally prevents certain bacteria from leaking out and others from getting in. When the intestinal barrier was compromised in his model, normally ‘‘beneficial’’ bacteria and the toxins they produce seeped into the bloodstream and raised the possibility they could slip past the blood-brain barrier. As one of his colleagues, Michael Fischbach, a microbiologist at the University of California, San Francisco, said: ‘‘The scientific community has a way of remaining skeptical until every last arrow has been drawn, until the entire picture is colored in. Other scientists drew the pencil outlines, and Sarkis is filling in a lot of the color.’’

Mazmanian knew the results offered only a provisional explanation for why restrictive diets and antibacterial treatments seemed to help some children with autism: Altering the microbial composition might be changing the permeability of the intestine. ‘‘The larger concept is, and this is pure speculation: Is a disease like autism really a disease of the brain or maybe a disease of the gut or some other aspect of physiology?’’ Mazmanian said. For any disease in which such a link could be proved, he saw a future in drugs derived from these small molecules found inside microbes. (A company he co-founded, Symbiotix Biotherapies, is developing a complex sugar called PSA, which is associated with Bacteroides fragilis, into treatments for intestinal disease and multiple sclerosis.) In his view, the prescriptive solutions probably involve more than increasing our exposure to environmental microbes in soil, dogs or even fermented foods; he believed there were wholesale failures in the way we shared our microbes and inoculated children with these bacteria. So far, though, the only conclusion he could draw was that disorders once thought to be conditions of the brain might be symptoms of microbial disruptions, and it was the careful defining of these disruptions that promised to be helpful in the coming decades.

The list of potential treatments incubating in labs around the world is startling. Several international groups have found that psychobiotics had subtle yet perceptible effects in healthy volunteers in a battery of brain-scanning and psychological tests. Another team in Arizona recently finished an open trial on fecal transplants in children with autism. (Simultaneously, at least two offshore clinics, in Australia and England, began offering fecal microbiota treatments to treat neurological disorders, like multiple sclerosis.) Mazmanian, however, cautions that this research is still in its infancy. ‘‘We’ve reached the stage where there’s a lot of, you know, ‘The microbiome is the cure for everything,’ ’’ he said. ‘‘I have a vested interest if it does. But I’d be shocked if it did.’’

Lyte issues the same caveat. ‘‘People are obviously desperate for solutions,’’ Lyte said when I visited him in Abilene. (He has since moved to Iowa State’s College of Veterinary Medicine.) ‘‘My main fear is the hype is running ahead of the science.’’ He knew that parents emailing him for answers meant they had exhausted every option offered by modern medicine. ‘‘It’s the Wild West out there,’’ he said. ‘‘You can go online and buy any amount of probiotics for any number of conditions now, and my paper is one of those cited. I never said go out and take probiotics.’’ He added, ‘‘We really need a lot more research done before we actually have people trying therapies out.’’

If the idea of psychobiotics had now, in some ways, eclipsed him, it was nevertheless a curious kind of affirmation, even redemption: an old-school microbiologist thrust into the midst of one of the most promising aspects of neuroscience. At the moment, he had a rough map in his head and a freezer full of monkey fecals that might translate, somehow, into telling differences between gregarious or shy monkeys later in life. I asked him if what amounted to a personality transplant still sounded a bit far-fetched. He seemed no closer to unlocking exactly what brain functions could be traced to the same organ that produced feces. ‘‘If you transfer the microbiota from one animal to another, you can transfer the behavior,’’ Lyte said. ‘‘What we’re trying to understand are the mechanisms by which the microbiota can influence the brain and development. If you believe that, are you now out on the precipice? The answer is yes. Do I think it’s the future? I think it’s a long way away.’’

Peter Andrey Smith is a reporter living in Brooklyn. He frequently writes about the microbial world.

Reporting for this article was supported by the UC Berkeley-11th Hour Food and Farming Journalism Fellowship.

In general, most people advocating austerity as an economic tool see a country's economy similar to a business or household budget.A country which has its own currency is not similar to business or personal finance as it can create spending money out of thin air (depending on many factors, it can have negative consequences). It does, however, create political fodder as people understand budgeting, and most voters and politicians are bothered by the continual growth of deficits and sovereign debt.On the other hand, a politically-motivated economist says austerity is one of the Seriously Bad Ideas, and government deficit spending is not concerning.

And the ultimate example of a seriously bad idea [austerity] is the determination, in the teeth of all the evidence, to declare government spending that helps the less fortunate a crucial cause of our economic problems. In the United States, I'm happy to say, this idea seems to be on the ropes, at least for now.

Throughout my life managing projects around the world, I have watched "proven" methods fail. What my life experiences have taught me is that there is no single "correct" solution. I am from an industry with loads of historical data, high span of control ability, and myriads of real-time data inputs (which are continuously morphed to optimize). The decision process for action begins with situational awareness, and solutions selected usually mimicked past solutions in similar situations.There was never an allusion that mimicking a past solution would work in current situation. The goal was to stay within the planned perimeters - or change the perimeters. In all events, the situation is closely monitored and if the expected results are not occurring, the solution is either modified or replaced with another. There was seldom any resistance to changing a solution which was not working. Data does not lie.Economic management is in the political arena. Few politicians will change any of their positions even with overwhelming evidence that it was a bad idea. I guess the politicians' rule book says if you change your idea, you are weak and wishy-washy. I guess I am as wishy-washy as John Maynard Keynes who famously said (attributed):

"When the facts change, I change my mind."

If the facts support your objectives, continue. If facts do not support your objective, revise what you are doing.Now back to this continuing debate between austerity or deficit spending. Did the USA take the path of deficit spending while the UK took the path of austerity? The UK did not do too badly with unemployment.

Unemployment UK (blue line) vs. USA (red line)(click to enlarge)

The UK did not do too badly with GDP.

GDP UK (blue line) vs. USA (red line)(click to enlarge)

The UK government spending as a percent of GDP peaked in 2009 and tapered since then (austerity?). [hat tip economicshelp.org] Please note the high percentage of UK government spending to GDP.

(click to enlarge)

The USA government spending peaked in 2009/2010 and tapered since then (austerity?).

Funny thing about labels like austerity. The UK seems to be doing a lot of deficit spending. [hat tip ukpublicspending.co.uk]

The USA is deficit spending as well.

(click to enlarge)

There are few things in economics as stupid as this debate which seems not based on any fact - it is often simply a theoretical and baseless argument. The example discussed of "austerity" in the UK and "no austerity" in the U.S. seems to point out what is often the case: The definition of austerity is determined by the political persuasions of the party in power and the party not in power. Of course there are cases where the term is definitely beyond the "coloration" of political persuasion - the current experience of Greece being a notable example.

During the past five years, the U.S. unemployment rate has dropped on average by 0.8 percentage points every 12 months. If that pace of decline were to persist, the jobless rate would hit 4.8% by December and 4% by December 2016.

However, Fed officials don’t think it will last.

In forecasts released last week, officials projected the jobless rate would fall to 5.2% or 5.3% by year-end, meaning little additional decline from the 5.5% registered in May or the 5.6% rate registered in December 2014. From there, officials see the rate settling at around 5% in 2016 and 2017. The decline in unemployment, in other words, has already nearly run its course, according to the Fed’s projections.

These projections are fraught with uncertainty, a point Fed Chairwoman Janet Yellen acknowledged in a press conference last week. The Fed has consistently underestimated how fast the jobless rate would fall in this recovery. In December 2013, for example, officials projected it would settle between 5.3% and 5.8% by the end of 2016. Instead it did so by December 2014, two years sooner than anticipated. In December 2012, officials thought the jobless rate would still be well above 6% at this point in the expansion.

Seeking to explain the Fed’s latest forecast, Ms. Yellen said last week that officials expect worker productivity growth to pick up in the months ahead. If that were to happen, firms would face less pressure to hire workers and that could thus slow the absorption of unemployed workers into jobs. Moreover, more individuals could re-enter the labor force, boosting the supply of labor and keeping the jobless rate elevated.

Yet the Fed misjudged the performance of worker productivity and labor force participation earlier in this recovery. Some analysts doubt it is right this time around. “The Fed’s forecasts for unemployment are so cautious as to be scarcely credible,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a recent research note.

What could go wrong with its forecast now and shift the interest rate outlook? This is one area to watch closely. If the jobless rate keeps falling at the pace already established in this expansion, Fed officials might find there is less slack in the job market than they expected, and be forced to raise interest rates more aggressively than planned.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.